A Re-Examination of Financial Analysts' Differential Earnings Forecast Accuracy

42 Pages Posted: 16 Oct 1996 Last revised: 1 Apr 2014

See all articles by Praveen Sinha

Praveen Sinha

California State University, Long Beach

Lawrence D. Brown

Temple University - Department of Accounting

Somnath Das

University of Illinois at Chicago

Abstract

This research re-examines whether there are differences in the forecast accuracy of financial analysts by comparing their annual earnings per share forecasts. The comparison of analyst forecast accuracy is made on both an ex post (within sample) and an ex ante (out of sample) basis. Early examinations of this issue by O'Brien (1990), Richards (1976), Brown and Rozeff (1980), O'Brien (1987), Coggin and Hunter (1989), Butler and Lang (1991) were ex post and suggest the absence of analysts who can provide relatively more accurate forecasts over multiple years.

Contrary to the results of prior research, and consistent with the belief in the popular press, we document that differences do exist in financial analysts' ex post forecast accuracy. We show that the previous studies failed to find differences in forecast accuracy due to inadequate (or no) control for differences in the recency of forecasts issued by the analysts. It has been well documented in the literature that forecast recency is positively related to forecast accuracy (Crichfield, et al, 1978; O'Brien, 1988; Brown, 1991). Thus, failure to control for forecast recency may reduce the power of tests, making it difficult to reject the null hypothesis of no differences in forecast accuracy even if they do exist.

JEL Classification: G29, M41

Suggested Citation

Sinha, Praveen and Brown, Lawrence D. and Das, Somnath, A Re-Examination of Financial Analysts' Differential Earnings Forecast Accuracy. Contemporary Accounting Research, Vol. 14, No. 1, Spring 1997. Available at SSRN: https://ssrn.com/abstract=2775

Praveen Sinha (Contact Author)

California State University, Long Beach ( email )

1250 Bellflower Blvd
Long Beach, CA 90064
United States

Lawrence D. Brown

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Somnath Das

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
312-996-4482 (Phone)
312-996-4520 (Fax)

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